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It is beginning to look like a mass extinction event. In 20 years the number of US public companies has dropped by half. Initial public offerings have dived; mergers and take-privates have risen. There is every reason to mourn this fact — and look at ways to fix it. Regulators started that effort on Thursday night. But there is also the path of acceptance, laid out in a report this week by Pantheon Capital, an asset manager: invest more in the private sector with its “active ownership model” and “strong corporate governance”. This came the same month that Uber lost its chief executive and two directors in the wake of mishandled sexual harassment allegations. Stellar corporate governance was not in evidence at the biggest private technology company. The same week an investor in Palantir, the data analytics company that is the fifth-highest valued “unicorn”, testified about an alleged lack of transparency and trouble selling shares. And it was the same day that Blue Apron, the meal kit service, limped towards an IPO at a 25 per cent discount to the price paid by mutual fund investors two years ago. There is certainly a dearth of public stocks. Blue Apron’s arrival boosts their number by one, but there are still only about 3,600 US-listed companies compared with double that number in 1996, as previously pointed out by academics including René Stulz and bank analysts including Michael Mauboussin.  Those companies that finally deign to offer themselves to the public often do so disdainfully, with multi-class share structures and little prospect of sizeable returns for new investors. Amazon has delivered a 56,000 per cent return since it went public 20 years ago. Snap, which had a $20bn valuation at its March IPO, would have to reach $11tn to match that. In this environment, no wonder that younger, faster-growing companies look attractive. But only wealthy individuals are allowed to play and it can be a perilous game for even sophisticated institutions. The likes of Fidelity and T Rowe Price have dipped their toes in. But as Pantheon’s Cullen Wilson notes: “Even though they are technically playing in the private market, mutual funds are still getting in at the later end. There is a still a larger piece of the company lifecycle that remains significantly more difficult to access, particularly compared with 15 or 20 years ago.” This was shown with Blue Apron this week, where Fidelity’s ability to jump the queue did not help at all. The mutual fund bought into the meal-kit vendor two years ago at $13.33 a share. A lack of appetite among public institutions led to the IPO price being cut to $10, where it closed on the first trading day. One response might be to get in even earlier. But mutual funds are not set up like venture capitalists, which are prepared for a majority of their investments to fail. Their portfolios have to be liquid to adjust for investor panic during market downturns. Portfolio managers are typically reluctant to allocate more than 2 or 3 per cent. With the private portion difficult or impossible to sell, a fund manager facing investor flight might otherwise be forced to sell good public stocks. Then there is the information asymmetry. Fidelity insists on quarterly financial statements and regular calls with management. Not all private investors have that clout. At Palantir, Marc Abramowitz, an early investor who says he has $60m of shares, has complained in a court filing that he and other investors were “deprived . . . of any information necessary to assess the value of their investments” and accused the company of “improperly interfering” with his attempts to sell the shares. Palantir denies the allegations and notes in its own filing to the Delaware Court of Chancery that it had first sued Mr Abramowitz for stealing trade secrets (which Mr Abramowitz denies). Whatever the outcome of these particular lawsuits, opacity and tension over share sales is a fact of life at many private start-ups. Getting in is hard enough; getting out can be impossible. On Thursday night the SEC under new Republican leadership announced a move to peel back regulations and encourage more companies to go public. It will allow any company to file for an IPO confidentially and then pick a good moment to press ahead, a manoeuvre previously restricted to companies with less than $1bn of revenues.

[Source”timesofindia”]